Investment spotlight: Prudential Guaranteed Investment

Does the idea of choosing investments make you feel nervous, lost, or intimidated? For many looking to build financial security by opening a 403(b) or IRA account, deciding how to invest their dollars can put the brakes on the process. “It’s often a source of uncertainty and frustration,” says Brenda Echeverria, Financial Planner at WEA Member Benefits. “The world of investing can seem overly complicated and there are so many choices. People don’t know where to begin or how to evaluate investment options,” she adds.

When less is more

We live in a society that values choice. But studies show there is such a thing as too many choices, especially with things you don’t know much about. For those who are just starting to entertain the idea of investing or who have little interest in becoming an expert, too many choices can be paralyzing.

“Member Benefits strives to make choosing investments easy for Wisconsin public school employees and their families,” says Brenda. “We’ve done a lot of the leg work for you, weeding through thousands of investment options to provide you with a manageable selection.”

The current lineup of 24 investments includes one fixed income option, a stable value fund, and 22 mutual funds (five of which are target retirement funds). Each fund is vetted through a strict investment process based on factors such as historical performance and operating expenses. Our selections provide you with enough choices in asset classes to satisfy different investment styles and objectives as well as levels of risk so that you can create a diversified portfolio—an important part of any investment strategy.

Get to know our options

Picking investments—even from a small list—requires some basic knowledge. “At Member Benefits, financial education is central to what we do. You don’t need to be an expert, but understanding basic principles about how to analyze an investment can help you make wise choices and feel confident about it,” Brenda says.

In our article, "Investment spotlight: Mutual Funds 101", we help you learn more about these principles. The article breaks down the mutual funds in our lineup to show the objectives and style, the role they play in a portfolio, and other important considerations for choosing investments.

First we shine a spotlight on the Prudential Guaranteed Investment (PGI). Not only was it the very first investment offered in our 403(b) program, but the PGI is really in a class all by itself. With the 2017 rate announcement scheduled for later this month, it seems an appropriate place to start.

Prudential Guaranteed Investment

About the PGI

The Prudential Guaranteed Investment (PGI)* is classified as a “fixed income” option. A fixed income investment pays regular income interest at a rate known in advance.

It is not a mutual fund but a group insurance contract that guarantees the principal and interest.

The PGI is suitable for long-term investors looking for a fixed income investment in their allocation mix because it’s a relatively conservative investment with a low degree of risk. How much you invest in a fixed income investment like this depends on your goals and timeline (age), among other things.

History lesson

In 1978, the WEA TSA Trust rolled out the guaranteed investment account to Wisconsin public school employees as a 403(b) investment opportunity—the first and only investment option in the program at the time.

Today, approximately 35,000 participants have nearly $2.3 billion worth of assets in this account that is held and managed by Prudential Retirement Insurance and Annuity Company (PRIAC).

An equity alternative

The PGI is primarily backed by bonds, commercial mortgages, and privately placed and publicly traded debt securities, which are essentially loans, in Prudential’s General Account. Because members receive a stated interest rate, their accounts do not react to the day-to-day volatility of the stock market.

Think about the impact that events like Brexit, a major election, or the release of unemployment or consumer spending statistics have on the stock market. The PGI is not affected in the same way by these types of events, which makes it a nice counter balance to stocks in a portfolio.

It’s all relative

If you were an educator in the 1980s participating in our 403(b) program, you likely enjoyed opening your statements each quarter. In 1982, the program hit an all-time high annual yield of 14.5%. Yes, that’s right—14.5%. But you may also remember that interest rates for borrowing money were sky high. Mortgage rates soared to 18.45% in October of 1981.

What’s the point of this trip down memory lane? It’s a lesson in relativity.

When the cost to borrow money is high, the PGI follows a similar trend. When money is cheap, the PGI tends to trend that way as well. For the better part of a decade, mortgage rates have been hovering around 3%. In 2016, the PGI annual credited rate is 3.8%.

If you find a fixed income investment that offers a better rate, approach with caution. Check the fees—you could lose the flexibility of having access to your money without penalty.

With the PGI, low is high

“While 3.8% is a far cry from 14.5% for the PGI, it’s a competitive rate compared to other low-risk options,” Brenda said.

At the time of this writing (September 16, 2016), most banks are paying less than 1% on savings accounts. Certificates of deposits (CDs) are not paying much more—an average five-year CD is at 1.65%. Money is cheap right now whether you’re buying or selling. As a borrower, it’s great. As a saver (who is essentially lending money to the bank), not so good.

If you do find a fixed income investment that offers a better rate, beware of any potential downsides and approach with caution, Brenda advises. “Check the fees. If there are surrender fees, you lose the flexibility of having access to your money without penalty.” Also, look at the investments within the fund and be aware of the impact market fluctuations might have on the rate. Remember, bonds traded on the open market are still vulnerable to market volatility.

Best when mixed

For those not comfortable investing in the stock market, the PGI is a good tool to protect against short-term volatility.

However, it may be too conservative on its own to get you where you want to be financially. While it may seem like a safe bet to put everything you have in the PGI, doing so may mean you have to save more or work longer (depending on your age and other investments) in order to reach your financial goals.

Instead, most allocation models call for diversification—an investment strategy that mixes a wide variety of investments within a portfolio. When you diversify, your individual investments are unlikely to all move up and down at the same time or rate. This leads to more consistent performance under a wide range of economic conditions, increasing your chance of higher returns over time while reducing your level of risk.
For more information about the PGI, go to weabenefits.com/pru.

Fund objective: To maximize the long-term rate of return consistent with insuring the safety of invested assets (principal). By carefully structuring a portfolio of commercial mortgages plus privately placed and publicly traded debt securities, the portfolio manager seeks to achieve higher yields than are available from public offerings, as well as an essential degree of liquidity.

This article is for informational purposes only and is not intended to constitute legal, financial, or tax advice. Certain recommendations or guidelines may not be appropriate for everyone. Consult your personal advisor or attorney for advice specific to your unique circumstances before taking action.

*Interest is compounded daily to produce the current annual yield prior to the deduction of program administrative fees. Contributions and earnings are held in the general account of Prudential Retirement Insurance and Annuity Company (PRIAC). Principal and net credited interest are fully guaranteed by PRIAC. Such guarantees are based solely upon the financial strength and claims-paying ability of PRIAC. For more information go to weabenefits.com/pru.

Interest is compounded daily to produce a 3.15% yield net of Prudential's administrative fee of 0.60%. PRIAC is compensated in connection with this product by deducting an amount for investment expenses and risk from the investment experience of certain
assets held in PRIAC's general account. For more information, go to weabenefits.com/pru.

Target retirement funds invest in a mix of stock and bond funds that steadily become more conservative as they approach their target date. Target retirement funds are not guaranteed and may gain or lose value now and after their target date.

Keep in mind that mutual fund investments are not guaranteed and may gain or lose value. Past performance is no guarantee for future results. Future performance may be lower or higher than past performance. Before investing in any mutual fund, call WEA Member Benefits at 1-800-279-4030 to request a prospectus. We advise you to read it carefully and consider the fund's investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other information about the investment company.

Seminars are free to attend; however, if you choose to invest in the WEA Tax Sheltered Annuity or WEAC IRA program, fees will apply. Consider all expenses before investing.

This is for informational purposes only and is not intended to constitute legal, financial, or tax advice. Certain recommendations or guidelines may not be appropriate for everyone. Consult your personal advisor or attorney for advice specific to your unique circumstances before taking action.

Equipment Breakdown insurance is underwritten by Mutual Boiler Re.

The Trustee Custodian for the Personal Investment Accounts
is Mid Atlantic Trust Company. The Personal Investment Account Program is
offered by WEA Financial Advisors, Inc., a registered and investment advisor
under the WEA Member Benefit Trust.